If you are the executor or administrator of an estate, there are several different tax forms that you may be required to file on behalf of the decedent (the person who passed away) and the decedent’s estate. The purpose of this article is to explain the different types of federal and Illinois state taxes you may need to file when a loved one passes, and explain under what circumstances each is required.
How Do Taxes for Deceased Individuals Work?
Before diving into the different types of taxes that an executor or administrator may be required to pay on behalf of a deceased individual, let’s discuss some basic principles and explain generally how taxes work when an individual passes away.
There are three major types of taxes that may be required after an individual passes away: (1) personal income tax, (2) estate income tax, and (3) estate tax. We will describe each in detail below. All of these taxes may be required on both the state and federal level, and returns for some of these taxes may need to be filed for multiple years.
Taxes are to be paid from the assets of the estate, not from the assets of the executor, administrator, heirs or beneficiaries. Taxes have the highest priority on estate funds, meaning that taxes must be paid in full before any creditors, heirs or beneficiaries are paid. The executor or administrator may be personally liable for the tax debt to the extent he or she distributes estate funds to creditors, heirs or beneficiaries instead of properly paying taxes on behalf of the estate.
If the decedent was required to pay federal and state income tax during his or her lifetime, you will likely be required to file a federal income tax return (Form 1040) and an Illinois state income tax return for the final year of the decedent’s life. The final tax year ends at the date that the decedent passed away. If the deceased individual was married at the time he or she passed, the decedent’s spouse may file a joint federal and state income tax return.
If the decedent was delinquent in filing tax returns for years prior to his or her death, you may be required to file income tax returns on both the state and federal level for any such previous years as well.
2. Federal and State Estate Income Tax
Probate estates are typically open for at least a year. If the decedent had a trust, that trust may be administered for decades. Sometimes the assets held in an estate will earn income during this time. You must file a federal and state income tax return on behalf of the estate or trust for each year in which the estate or trust receives more than $600.00 in gross income.
This is distinguished from the final year income tax return for the individual decedent. The decedent’s final year income tax return covers the time period during the last tax year of the decedent’s life prior to the decedent’s death. The estate or trust income tax return covers the period from the date of death forward. The estate or trust will have a separate tax identification number from that of the decedent and is considered a distinct taxable entity. Form 1041 is the form used for federal estate income tax returns.
The taxable year for an estate begins on the date the decedent passed away and continues for 12 months following that date. The estate income tax returns are due 4 months after the end of each taxable year.
3. Federal and State Estate Tax
Unlike income tax, estate tax deals with the total amount of assets in the estate, as opposed to income earned by those assets. Estate tax only applies to estates with total assets exceeding the federal and/or state exemption amounts. In 2017, the federal estate tax exemption is $5.49 million. If the estate in question has more taxable assets than this amount, then you must file a federal estate tax return. The Illinois estate tax exemption is $4 million in 2017. If the estate has more taxable assets than $4 million, then you must file an Illinois estate tax return. Estate tax is only applied to amounts over and above the applicable exemption amount.
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